3 Predictable Stocks with 50+ Years of Dividend Growth; Can They Continue?
Stock Analysis & Ideas

3 Predictable Stocks with 50+ Years of Dividend Growth; Can They Continue?

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These three water stocks have increased their dividends every year for over half a century. Due to their predictable characteristics, it’s highly likely that this growth will continue for the foreseeable future.

Water utilities are commonly considered great dividend growth stocks because they tend to generate stable and predictable cash flows, which allows them to pay growing dividends. Most major water utility stocks feature exceptional dividend-growth track records, but three stocks, in particular, have really taken their commitment to growing dividends to another level. Specifically, American States Water (NYSE: AWR), California Water Service Group (NYSE: CWT), and Middlesex Water Company (NASDAQ: MSEX) have increased their dividends for 68, 54, and 50 consecutive years, respectively.

In fact, American States Water boasts the lengthiest dividend-growth record among all stocks.

In this article, we will examine how these three water stocks have managed such consistent growth, as well as their dividend safety and dividend-growth prospects.

How Can Such Dividend-Growth Records be Preserved?

It’s not uncommon for stocks to feature extended dividend-growth track records. However, water stocks – AWR, CWT, and MSEX, in particular – have increased their dividends consistently for more than half a century. How can such long dividend growth be sustained? Well, water stocks share some unusual properties that allow them to generate some of the most secure and predictable cash flows among any type of business. Thus, they can safely grow their dividends over time with little worry about how they will be performing a decade from now. Let’s discuss two of their most notable properties:

1. A Necessity-Type Business Model

Water consumption is essential for survival. Therefore, people consume stable amounts over time regardless of external factors, including the state of the economy. Further, water is highly inelastic. Even if its price were to go up, demand for it would not be affected. Therefore, water utilities enjoy extremely predictable revenues. No matter what is happening in the world, water consumption levels can hardly be moved by any factors.

2. Predictable Revenue Growth

If enjoying predictable consumption levels wasn’t enough, dividend growth is uncomplicated for water utilities, as they also benefit by easily predicting their revenue growth. This is because they can relatively easily predict the population growth of the areas they serve over time and because they get to request fair rate increases from regulators.

This last one is typically done through a process known as rate case filing, through which utilities will usually outline a proposal for the reasons why it is requesting a rate hike, such as increased operating costs or infrastructure upgrades. These rate hikes usually outperform inflation, allowing for notable top-line growth. For instance, CWT’s estimated regulated rate base is expected to rise by more than 40% by 2025.

Thus, American States Water, California Water Service Group, and Middlesex Water Company have excellent revenue-growth visibility, which allows them to grow their dividends responsibly, in line with their expected future net income growth expectations.

Dividend Safety & Growth Prospects

Dividends from AWR, CWT, and MSEX appear to be exceptionally safe. Their payouts stand at roughly 69%, 66%, and 48%, respectively, and with virtually no threat to their operations, there is no reason to fear that their dividends are in danger. In fact, all three companies should continue to grow their payouts, as they have done for over half a century. The better question is, what dividend-growth rate is most likely?

Well, AWR, CWT, and MSEX have grown their dividends at 10-year CAGRs of 9.6%, 4.6%, and 6.5%, respectively. This pace hasn’t grown much in the most recent years, with their five-year dividend-per-share CAGRs standing at 8.8%, 6.7%, and 4.6%, respectively.

Based on population-growth trends for each company, their base rate cases, and analysts’ earnings-per-share growth estimates, I believe that all three companies will keep growing their dividends at an annual pace in the mid-single digits. Of course, there will be a marginal difference, but on average, dividend growth is quite likely to remain in line with their historical ones.

What are the Price Targets for AWR, CWT, and MSEX Shares?

Turning to Wall Street, AWR stock has a Hold rating based on one Buy, one Hold, and two Sell ratings assigned in the past three months. The average AWR stock price target of $97.33 implies 3.49% upside potential.

As far as CWT goes, the stock has a Hold rating based on one Buy, one Hold, and one Sell rating assigned in the past three months. The average CWT stock price target of $63.67 implies 3.9% upside potential.

Unfortunately, MSEX stock lacks analyst coverage.

Beyond the Dividends

Beyond their dividend-growth prospects, AWR, CWT, and MSEX aren’t necessarily great investments right now, which explains the lack of bullish ratings. Despite constantly growing their dividends at respectable rates, their yields stand at just 1.7%, 1.6%, and 1.5%, respectively. This is because all three stocks trade at quite expensive valuations.

Essentially, the market over-appreciates their unparalleled qualities and is willing to pay a premium. Nevertheless, this could limit the prospects of their future total returns, even though all three companies should continue building their multi-decade dividend growth track records with ease.



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